Tuesday, June 25, 2013

How They'll Come for Retirement Accounts

“They won’t take our bank accounts…they will take our retirement accounts.” - Jim Rogers

There is more financial chaos awaiting us. Mr. Rogers, who has a good eye for financial & political issues, mentions a topic bandied about in the press; the possibility of the federal government seizing, slicing, taxing or using retirement accounts to cover for our problems. The American Thinker and Investors' Business Daily both dislike the idea and warn readers of it. Time and the NY Times discuss an exciting, new option for people who find retirement confusing and potentially scary. PBS ran a Frontline special on how bad they are. The horror! The battle lines are being drawn in the open, but the general concept is that the Feds will come after the money to use it to fund their deficit spending. There is the annuity path, which would be more focused for government spending, and the straight slicing, tax path for another big bailout (FED's multitrillion dollar balance sheet will need one). Even if from an external source, the feds + banks will amplify or generate a crisis to make their move.

Problem one is our economy is not growing. The stall speed job and GDP growth are not enough for us to get out of the output gap we're in right now. Problem two is the US relies on external funding for our trillion dollar a year deficit that will not continue at the current levels forever. This is guaranteed. Problem three is that interest rates are so low and our interest expense is still high due to total debt. Any slight bump up in long term interest rates to say 4% from the 2% they are now would cause a currency crisis. Growth would fix part of the problem, and so would trimming federal spending, but we need to be serious about the funding problem. In a perfect world, the USG would go after the big banks, break them up, write down debt to spur consumer pocketbooks, make a deal with corporations to repatriate and tax their offshore cash and trim spending everywhere to get a balanced budget or close. Since that la-la land tale is not going to happen, fiddling with people's 401ks is a fear and small possibility. So how is this crisis and pitch going to go?

The ground has been prepared that 401ks are a bit of a scam (they're not). They don't reward people the same. You can outlive your earnings. Boohoo. The average man dies at 75, so if you work to 65, and don't have enough money saved to live 10 years, what the fuck were you doing? The minds of plebeians have been massaged a bit. The government is setting up annuity programs and the infrastructure to turn your savings into a funding source for their borrowing. With a framework in place, all they need is a push. The push might come in the process of an external funding source like China, Russia, South Korea, Japan, the oil exporters reducing their purchases in an amount that causes marginal pricing moves but enough to cause the others to sell a bit to get out as their portfolios take a hit. As the US interest rates rise, the big banks set up their shorts and then tank the market to scare remaining sheeple into bonds to stem the bleeding. Even if it is just a 20% drop, the average 401k is going to take a hit. The most important part is that Boomers, retired or on the edge of retirement, are going to freak. People will be scared about what they have to retire on. Here's the pitch.

"Worried about retirement? Has the latest crash turned your 401k into a 301k? Isn't this the 3rd time in 15 years? Set up an inflation protected, government annuity program and get guaranteed returns for as long as you live." - Future Government Paid Advertisement

Boomers are fucking stupid. Enough of them will buy this. These will be inflation protected, but the very group that would pay more for inflation would be the authority setting the inflation number. What a scam! This would be a temporary fix program, because once the foreigners start selling, they will figure a way to slowly divest their holdings and it will not stop. The annuity grab will slow down a crisis but not prevent the big one. There are $5.1 trillion in defined contribution plans and $2.6 trillion in defined benefit plans (source), so even if they slide just 10% over to an annuity program, that is $700 billion. The government could even set these up to be held in custodial accounts by the big commercial banks to help generate fees for them. That would help the status quo powers, and when it didn't work, well you were a sucker.

The situation I see happening with a higher probability is flavored a bit more to modern Democrat tastes. The FED has turned into a hedge fund and has a multitrillion dollar balance sheet with plenty of long term paper on it. They have virtually no short term holdings since their QE programs have bought the long term bond issuance. Who bails out the FED? You will. In a situation where foreign buying turns to selling or even just slows significantly, interest rates rise and the FED gets in trouble. With a balance sheet north of 3 or maybe 4 trillion, each % point rise in interest rates costs them over $125 billion. But shucks we need the FED to keep pumping the banks with cash to keep the economy moving, preventing the end of the world. The Treasury would bail out the FED, and how will they get the money? You. Stop thinking of yourself and think like a Democrat, semi-literate voter. As long as Obama's beige face or Hillary's blonde doo is at the podium telling them to support it, they will back any measure that props up the banks. The Cyprus style bail-in in America will not be with bank accounts, but will be a one time hit to IRAs and defined contribution plans that total $10.5 trillion. They may spare accounts under 50K in total, but this won't matter to Dems as long it is excludes government employee pensions, and we know welfare cases don't have IRAs and 401ks. The USG could lop 15% and scoop $1.5 trillion, which will cover the FED's bailout and set up the next transfer mechanism to the banks. They could even wheel out old Warren Buffet if he's still alive to sell this. Why 15%, because the USG could argue that the average marginal tax rate that 401ks helped those savers avoid taxes was 15% (it's a lie, but it is all lies).

"It's only fair that those people who avoided taxes all of those years and enjoyed that tax free growth contribute back to society the 15%. It's only 15%. What, they can't part with what amounts to a tip? This will save the financial system and prevent the implosion of our economy. Do they want to wreck the economy to pad their retirement? We're not touching anything under $100,000, and who has more than $100,000 saved anyway? Fat cat hoarders, that's who. Los gatos gordos!" - Obama/Hildawg

I really hope I am wrong about this. There are enough leeches in America who would support this. The media will mostly get behind it as long as a Democrat proposes this, and the banks will boost advertising budgets to make sure of media compliance. This will not prevent the implosion of everything, only delay it. A problem that our elite created is that through the dream of globalization, they sent too many dollars out in their haste to capture a greater share of domestic dollars. That global wealth, drained away from the middle classes of the west and shipped to 3rd world hands, wants a seat at the table. They wouldn't be titling their conferences "Reinventing Bretton Woods" if they were not serious. Our elites falsely operate as if they were in a vacuum. Instead of clinging to a system that is beyond repair, they should be looking for a replacement. Like a modern momo daytrader, they think they'll be the first to the exit will all of their stuff when the iceberg hits. They can't see that the boats already taking on water.


Drunk Idiot said...

"Worried about retirement? Has the latest crash turned your 401k into a 301k? Isn't this the 3rd time in 15 years? Set up an inflation protected, government annuity program and get guaranteed returns for as long as you live." - Future Government Paid Advertisement

Future legislation to be cobbled together by Senators Schumer, Durbin, Reid, McCain, Graham, Rubio, Ayotte, etc.

Future Government Paid Advertisement to feature impassioned plea by Senator Rubio to bring millions of Americans' retirement savings "out of the shadows."

PRCD said...

So does it still make sense to contribute to your 401(k) up to the employer match? What about saving for retirement in just a regular brokerage account filled with indexed ETFs?

It seems to me you ought to keep saving your money, but can't the government technically grab anything it wants?

Perhaps we need a primer on how to offshore cash.

Son of Brock Landers said...

@PRCD - Getting the employer match still makes sense. That usually ends after 5-7% and 50% of that 5-7%. How fast can you accrue over 50 or 100K. Saving outside makes sense. I'd use equity or muni bond investing in the outside accounts to avoid taxes.

PRCD said...

THe returns seem awfully low for bonds. Do you have any good resources on muni bond investing? What do you mean by 'equity'? How do you know how much to throw tax-reducing investment vehicles vs. regular stocks?

I tend to be a Boglehead, btw.

Son of Brock Landers said...

When I say equity, I just mean stocks. That way, you only get taxed on dividends and if you sell on a long term cap gains rate. Buying taxable bonds sets you up for constant taxation. All bonds seem low right now due to QE. I'd stay on the short end of the duration spectrum for now. I believe in indexing as well so vehicles like mutual funds and etfs that are indexed to munis are fine.